We see a larger opportunity in the value basket: Vetri Subramaniam

Interview with Chief Investment Officer, Religare Invesco Mutual Fund

The economy is sluggish but fund managers are looking to position portfolios for a recovery, buying into stocks that fall in the value zone. Vetri Subramaniam, chief investment officer, Religare Invesco MF, spoke to Clifford Alvares on value buying and why investors will look for funds that provide market-beating returns, and more. Edited excerpts:

Financial intermediary fees are sliding. Do you see that happening in fund management?

Yes, across financial service intermediaries, whether investment banking or broking, fees charged by gate-keepers have collapsed. Eventually, it will also show in asset management. On the fixed income side, fees have already collapsed; in equity, pressure has still not arrived but it will eventually come because of the rise of ETFs (exchange-traded funds). The costs of ETFs are high as no human intervention is required. Once more segments such as insurance participate, that might be the trigger for ETF charges to fall.
 

So, how can asset management companies (AMCs) justify charging investors for fund management?

For AMCs, in the final analysis, it boils down to in-house capacity to create alpha. Create market-beating returns and you'll be paid. Investors allocating assets will want low cost for market returns and will pay for those who beat the market averages. Globally, asset allocators are putting money in ETFs for market returns. Over and above that, they are looking for managers able to create above-market returns.

Isn't it getting more difficult to beat market averages now?

It is getting very difficult to create alpha. It was easier 10 years ago and, over time, alpha creation has continuously dropped. But some funds will always do better; there are opportunities in the market but one has to identify these.

How do you see the Sensex's performance in the long run?

Thirty-five years of data tell you that every 10-year average return on equity is trending towards 15 per cent. That's good enough and it's a completely unemotional figure, capturing the impact of panic, euphoria, good and bad corporate governance. The beauty is the index tells you that over a number of years, equity as an asset class has made money. The economy needs to grow, entry-level barriers need to be good but, over time, returns have tended to be 15 per cent (yearly).

Sometimes, equities might fall badly. How should an investor allocate in these times?

An investor needs to have some sort of a model and, therefore, needs an advisor as a guide, at some level, of how to plan and manage finances with 10-year, 20-year or 30-year horizons, including asset allocation. When asset valuation turns extreme, one re-allocates among asset classes. A fund manager's clear and distinct role is to create alpha over and above an index. A wealth manager or financial planner has a role not only to consider asset allocation but also insurance and other financial needs. Second, he is helping one choose funds that can create the alpha against benchmarks.

So, how are you positioning your portfolio?

Growth companies are trading at huge premiums. It's not that they have not grown but their PE (price to earnings ratio) premiums have expanded more than their value. Now, the larger opportunity lies in the value basket. At some point, recovery will occur. The key to survival is a healthier balance sheet. We don't mind a challenged P&L (profit and loss account) but we don't want a challenged balance sheet. Small & mid-caps are at a discount to large-caps. Allocation to cyclical areas has increased.

Exports will continue to be a part of our portfolio but we will keep an eye on valuations. Stocks have run up significantly there.

Are retail individuals ready to pay advisors?

We are certainly seeing advisories picking up. And, investors will need to seek out the opportunities in different asset classes - gold, equity or debt - and move around when required.

Has the economy bottomed out? Do you see a recovery?

The economy still seems stuck. There's no sign of any growth or uptrend in business. The high frequency figures-automobile sales, cement dispatches-don't indicate an upswing. The only uptick is in exports. The positive thing is that in the next 18 months, there's a fair amount of initiative to set things right. The current account deficit has reduced; brakes have been put on spending, Though it's bad for growth now, it's contracting the fiscal deficit. Tailwinds from project approvals and fiscal prudence should come some time in the next 18-24 months. But high growth rates are unlikely.